Twitter IPO Leads to Sky-High $24 Billion Valuation

In its first day as a publicly traded company, Twitter blew past everyone’s expectations — including its own. The seven-year-old social network saw its stock price soar from an initial public offering price of $26 to $44.90, a 73 percent increase. After one day of trading Twitter already has a greater valuation than currently hot tech companies like Netflix and LinkedIn.

The high price means Twitter underestimated the value of its own stock and likely left money on the table. The company pocketed $1.8 billion when it priced its IPO at $26 Wednesday night, but clearly could have raised the price even higher. Still, the strong first-day increase makes Twitter’s one of the most successful IPOs of the year. Out of 193 public offerings so far this year, Twitter’s day-one jump was the 14th largest, according to Renaissance Capital, an investment firm that manages IPO funds.

“There’s obviously a lot more optimism than even what we were thinking in terms of what the company’s worth,” says Rick Summer a senior equity analyst at Morningstar. “It’s clear that investors are clamoring for technology, they’re clamoring for growth.”

The day began with Twitter executives — including CEO Dick Costolo and founders Eavn Williams, Biz Stone and Jack Dorsey — helping to kick things off at the New York Stock Exchange. But they brought some Twitter users to help them: actor Patrick Stewart, a representative from the Boston Police Department and Vivienne Harr, a nine-year-old who sold lemonade to raise money to end child slavery, rang the opening bell for the exchange.

Intense early demand led the stock to begin trading at $45.10, a huge jump from the IPO pricing. When the stock was officially available to the public at about 10:50 a.m., traders pushed the price to $50 in the first ten minutes, but it quickly receded and hovered between $45 and $46 for most the day.

Twitter, which launched in 2006 primarily as a way for people to post short messages via texting, seems to have effectively sold investors on the idea that it can become the water cooler of the Internet, a gathering place for a global userbase for everything from breaking news events to the latest episode of Scandal. “This company is a significant enterprise that most professional investors believe is going to be around for a while and has quite the capability of being a major generator of advertising revenue,” says Kathleen Smith, the principal analyst for Renaissance Capital.

The Twitter IPO was a stark contrast from Facebook’s public offering last May, which was plagued by technical glitches and ended the day just 23 cents above its IPO pricing. Still, some analysts aren’t convinced that Twitter’s stock won’t suffer the same fate as Facebook’s, which plummeted just after its IPO and didn’t recover for months.

“All stocks converge to the price that they’re worth, and the company is not worth $45 in our opinion,” Summer says. “Given that it’s a lot more likely that [investors] are going to lose money than make an appropriate rate of return, it’s really not a good time to get into the stock.”

While buying stock in an IPO is always an investment in the future, that fact is even more pronounced with Twitter, which has never turned a profit. The company lost $134 million in the first nine months of this year, almost double the net loss of the same period in 2012. Facebook, by contrast, generated $205 million in earnings the quarter before it went public.

The company has expressed confidence that it will be able to turn on the profits spigot when it needs to. “There’s nothing structural about Twitter that prevents us from having the kind of margin profiles of our peer group,” Costolo told CNBC this morning. “We are investing for the long term.”

So far, at least, Wall Street is along for the ride. “The expectations are very high right now with Twitter and this valuation it has,” Smith says. “In a way, it better surprise us a whole lot on the upside, and continue to surprise us.”